Ladies and gentlemen, thank you for standing by and welcome to the Eaton's First Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Yan Jin, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning. I'm Yan Jin, Eaton's Senior Vice President of Investor Relations. Thank you all for joining us today for Eaton's First Quarter 2019 Earning Call. With me today are Craig Arnold, our Chairman and CEO, and Rick Fearon, Vice Chairman and Chief Financial and Planning Officer. Our agenda today includes the opening remarks by Craig, highlighting the Company's performance in the first quarter. As we have done in our past calls, we will be taking questions at the end of Craig's comments. The press release from our earnings announcement this morning and the presentation we will go through today, have been posted on our website at www.eaton.com. Please note that both press release and the presentation include reconciliations to non-GAAP measures. A webcast of this call is available on our website and will be available for replay. Before we get started, I would like to remind you that our comments today will include statements related to expected future results of the Company and are therefore, forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risk and uncertainties that are described in our earnings release and the presentation, that are also outlined in our related 8-K filing. And with that, I'll turn it over to Craig.

Thanks, Jin. Appreciate it. Yes, I'll begin with Page 3 and the highlights of our Q1 results, and I begin by saying, we had a good start to the year with another strong quarter of performance. Earnings per share were $1.23 on a GAAP basis and $1.26 excluding the impact of the divestiture costs related to the announced spin-off of our Lighting business. At $1.26, our results were 15% above last year and toward the higher end of our guidance range, which as you will recall was $1.18 to $1.28. Our sales were $5.3 billion, up 4% organically and in line with our guidance, excluding the negative 3% impact from currency. And we continue to be pleased with our strong margin performance. Segment margins were 16% above the high end of our guidance range and 80 basis points over prior year. We also generated very strong operating cash flows of $551 million in the quarter, and this is up 63% from Q1 2018 and a first quarter record. And lastly, we repurchased $150 million of shares in the quarter as part of our plan to buy back $400 million of shares in 2019. So, a very good start to the year. Page 4 summarizes our income statement versus prior year. And I've covered most of these items in the summary comments and so I'll only point out once again, the 3% currency impact was driven primarily by the important currencies for us which are the euro, renminbi and real. We are very pleased with our 32% incremental rate that we delivered on organic growth. And so, that number was, once again, very strong and above our expectations. And we incurred as we mentioned, the $0.03 per share from the after-tax cost primarily related to the spin of our Lighting business.…

Okay. Thanks, Craig. Before we begin the Q&A session of our call today, I do see we have members of individuals peers that in the queue is present. So given our time constraint over to be an hour today and our desire to get to as many of these questions as possible, please limit your opportunity to just one question and a follow-up. So with that, I will turn it over to our operator to give you guys the guidance.

[Operator Instructions]

Okay. We will take our first question from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, everyone. Craig, could you maybe expand on your comments on commercial and data centers being up double-digits in ES&S this quarter? We heard some conflicting news, especially in the data center side, out of the supply chain. And so any other further color you can provide there would be helpful.

Yes, now the only thing I would tell you that, overall the data center market for us continues to perform very well. We are still running as I mentioned, our revenue is up double-digit for data center sales. Activity levels continue to be quite strong. I think the piece that I - that we are trying to clarify for the sake of all of you who follow the Company, that data center orders, especially when it comes to the hyper scale, they tend to be quite lumpy. So, you will get a big slug of orders in one quarter and they will be lighter the next quarter, and so that is why we made this decision to really move to a rolling 12 months, because we think it more accurately reflects the underlying economic activity that we are seeing in that market. But for us, we still see very good strength and data center activity overall, and we continue to think that is going to be one of our fastest growing segments. I mentioned once again, we take a look at negotiations, which is the level which for us is a good proxy for the level of economic activity that is taking place in the market. And as I mentioned, we are really experiencing record levels of activity in our Electrical Systems & Services business, but negotiation is up 56% in the quarter to record levels. And so, by and large, we have really seen no let up in activity in Electrical Systems & Services and data centers continues to be a bright spot for us.

And Craig, within commercial, what are the verticals that are really driving the strength there?

Yes, I would say we are really seeing pretty broad-based strengths in the commercial businesses overall. And certainly, oil and gas is - has come back and we mentioned this to strengthen data centers. We...

Yes, for example if you look at straight up commercial like office and government, both up just over 10% institutional, just a little bit under that. But we are seeing broad-based strength in the commercial side of things. And if you look at some of the governmental data, C30 reports except for the new Dodge report Europe has seen, numbers that are high-single-digit, even low double-digits. So it, it's all pretty consistent.

Right. It's broad too and we are seeing also strength really around the world as well. And in commercial businesses in general. So it's not just in the U.S. market.

Now, that is helpful. Maybe my follow-on just on the Hydraulics business. You know it's interesting, because it sounded like when we had met intra-quarter, that Hydraulics had maybe gotten off to a better start in January, February. And you have talked about this, this business and all your businesses meeting to kind of earn the right to be part of the portfolio. Yet, we have taken guidance down already to start the year. And so can you just kind of contextualize how the quarter went with Hydraulics? And then also in terms of - like how it fits with the portfolio longer term?

First of all I would say, as we have talked about and recovered during our Investor Day in general, that we have some work to do to fix, what I would call some self-inflicted wounds associated with some short move transition, site transition that we are managing internally as an organization. And we always believed that was going to be more of a kind of a second half kind of resolution to some of the internal issues. I think the new news for us in the Hydraulics business in terms of what really drove the reduction guidance is largely some of the weakness that we are seeing in some of our end markets. And so, I would say operationally as we acknowledge, we still have work to do to fix some of our own inefficiencies and our teams are working that. And we certainly would expect that stuff to be flushed through the system by the time we hit the second half of the year. But the new piece is really some of the weakness that we are seeing, largely in some of the mobile equipment market. And I would say that our orders were certainly weak in Q1. If you take a look at some of our customers, all the names that you know well, I would say their sales are holding up better than our orders are. And so there could be a better outlook as we look forward. We are not sure to what extent. There is some inventory repositioning taking place in this segment. But right now, it's really more a function of weaker volumes. And at this point, I would say as we think about Hydraulics as a part of Eaton overall, today, we have a plan and the plan is a plan that we believe in. And our team is executing that plan and we fully expect the Hydraulics team to fix their operational issues and turn that into a business that we can all be proud of and would anticipate keeping as a part of the Company. But for Hydraulics, no different to any other part of the Company, we have expectations that we call all of our businesses accountable to. And we would expect them to meet the criteria that we set and if we can't meet the criteria for Hydraulics or for any part of the Company, we are willing to act when necessary.

Thank you.

Our next question is coming from Jeff Sprague with Vertical Research.

Thank you. Good morning, everyone. Good morning. I was wondering if you could just come back to ES&S one more time anyhow? And just give us some color on what - negotiation is up 36% really means obviously it sounds good. Is that kind of a project value in dollars? Was there some kind of low ebb in Q1 last year that results in that being such a big healthy number and what kind of typical conversion rate would you have on kind of a negotiation?

Yes, no. I mean, the first thing I'll just answer is kind of the question around noise. There is absolutely nothing in Q1 of last year that would suggest that we had a low bar to clear. As I mentioned, it not only was higher than Q1 last year, but it was a record all-time level and was significantly higher than any other quarter during the course of 2018. And I think just as you articulate, this is essentially the number of bid and quotations that we are making to our various customers on large projects that we bid on during the course of the period. And so, it really for us is probably the best proxy for the level of underlying economic activity that we have in that business. So we think it's a really strong indicator of the fact that this business, a long-cycle business that we would expect to be performing very well at this point in the cycle, is actually performing very much like we anticipate.

And it will take time for some of these negotiation bids to become final bids, typically 90 days to 180 days, sometimes a little longer for big projects. But yet, it is quite notable just how strong the activity levels are.

And just as a follow-up separately on Ulusoy. Is it $0.02 accretive for the year, and therefore the sole reason for the guide or you'd actually more than that and there is maybe a negative offset somewhere else in the equation?

No, it's $0.02 accretive and the way to think about it Jeff is, it's really $0.04 accretive, but we have $0.02 of our estimate right now of amortization of intangible costs. And so, that is how it ends up at $0.02.

Great. Thank you.

But we are in fact holding all the other elements of the guide for the core business, and so no change at all.

Thank you.

Our next question is coming from Scott Davis from Melius Research.

Right. Good morning, guys. Just to be clear, the reason why you are not raising margin guidance on ES&S, is that because of mix and largely just because of the data center volumes, is that correct?

First of all, I would say early in the year. I would say that our forecast for margins in ES&S is certainly today within the range that we set for the year. And a lot of the growth to your point, is coming from projects and so we will have to wait and see how that plays out. But right now, I would not in any way take it as a sign of concern about margins in our ES&S business. Things are going quite well and we are very pleased with our margins in Q1 and there is nothing today that I would say that would suggest that if there is anything to be concerned about.

Okay. And the -- it's been actually kind of get your take, Craig, on some of the M&A that is out there. I mean you have got a couple of competitors who have announced really big deals. Nothing seems cheap. They all seem to be relatively fully priced. But what is your take on the market out there and the likelihood that Eaton participates? I guess, there is two ways to think about it, you could be a seller of assets into this market of strength as easily as you could be a buyer of assets. So how do you think about that in the current?

The first thing with respect to pricing and asset values in as you can see by some of the transactions that have been announced, I mean these properties are going for extraordinary prices. We have prided ourselves on the fact that we said we are going to be disciplined through this cycle, and we think that our cost of capital continues to be 8% to 9% and we want to deliver 300 basis points over our cost of capital. And so we will continue to be a disciplined buyer into a market that looks like assets being priced at extraordinary levels. And so I would say that we today, are looking at probably more deals than we have in a very long time, and so we have a very active pipeline as well. But we will make the commitment as we have in the past. We are not going to chase deals with what I would say are unattractive returns when you look at their cash on cash set of financial metrics. So that is kind of the way we look at it.

But the other side of that, obviously Craig, as you could sell something, I mean if people are willing to pay for a price and maybe now is the time to think about partnering with some of maybe a more cyclical stocks, is that a possibility?

Yes. First of all, I would say we took a look at our businesses strategically through the cycle. And so as we think about the portfolio itself and how we hold to a seller, we are really trying to look at them over the long-term period and whether or not we think this is going to be a good strategic hole based upon the criteria that we established through the cycle. Now having said that to your point, if you have come to a decision that you want to exit as asset, now would be a great time to do it. But we generally take a longer term, let's say, more strategic view of the portfolio in terms of things that we want to - businesses that we want to be in versus businesses that we would choose to exit.

That is fair. Thank you and good luck to you guys.

Alright, thank you.

Our next question from Nicole DeBlase with Deutsche Bank.

Yes, thanks. Good morning guys. So I just want to focus a little bit on Hydraulics. I know organic growth was 1% this quarter. Looks like in your full-year guidance you have brought it down a little bit, but you are still basically implying some improvement organic growth throughout the year. So I guess, I'm curious what is driving that conviction and maybe just frame that with how demand progressed throughout the quarter, if there was any sign of improvement in March or into early April?

I would say that maybe to take your first question right out of the gate in terms of, certainly we are implying a little bit stronger growth in the back half of the year than we delivered in Q1. As I mentioned in my opening commentary, that 1% organic growth was actually within 1% of our internal plan. And so, we are actually not off our internal plan by a measurable amount in Q1. And the comps get easier quite frankly, as the year moves on. And we have very specific programs that we are working on as a company that will also help boost growth as we look into some of the out-quarters, very specific initiatives that we are working on, that have been largely bedded down, that are going to help improve our growth. And the other thing I would tell you is that, if you take a look at the major end markets that we serve construction equipment, Ag equipment, two of our big important markets in Hydraulics and you look at what our customers are saying, in most cases, they are still forecasting growth for the year. They are forecasting low single-digit kind of growth levels. And so we do believe that there was a little bit of inventory correction that took place in Q1 that probably also held down our relative growth rate.

Okay, got it. Thanks, Craig. And then just shifting to Aerospace, the margin performance was really impressive this quarter. Was there anything special going on there? Is it a mix impact that isn't sustainable throughout the rest of the year just because the full-year guidance implies a little bit less margin expansion than we saw in the first quarter?

Yes, I mean it certainly was a record quarter for margins in Aerospace, an all-time record, not just a record for Q1 and I would say that we did have a bit of favorable mix in Q1. Our aftermarket business on a relative basis was a bit stronger than our core OE business, and that certainly was a help for the quarter, but also the growth in the volume as well also helped push things up. And so I would say, principally, it was more a function of the mix of customers and the mix of OE aftermarket that really led to a really strong Q1 performance, that is probably not sustainable at those levels. But as you can see, we are forecasting margins for Aerospace that are once again at record levels and I would say even in many cases industry-leading levels.

Got it. Thank you.

Our next question comes from Ann Duignan with JPMorgan.

Hi, guys. Just back to ES&S again, I know you said bidding is up significantly, but traditionally what kind of success rates would you have been, what percent win versus not win have you had?

We have pretty strong market share Ann, in our businesses. As you know, I mean, in our Electrical Systems & Services business, a lot of this activity is in the Americas market and we have industry-leading shares in this business. And so our win rate is going to be very much consistent with our underlying market share. So we do believe that this bidding activity will translate ultimately to growth in our business.

Okay, that is helpful color. Appreciate it. And then back to Hydraulics also, I have to ask the question about North American agriculture, of course. Maybe you could talk about what your customers are saying there? Is that where the weakness was in the quarter in term of orders? And given how bad farmer sentiment is in the US, would you anticipate that maybe staying weaker than expected for the full-year?

Yes, I mean, you are absolutely right that sales were actually quite decent in Ag in Q1. But the order rates in Ag was down. And to your point, it's farm incomes and underlying commodity prices being as weak as they are, that we think are certainly dampening some of the enthusiasm for the outlook in Ag markets. And I think our call on Ag for the year, we felt like it's kind of a low single-digit kind of grower for the year, but we do think that there is at least a cautionary kind of sentiment that is in the market today in and around Ag in general.

Yes, I would think we would have a similar view of the Ag market for 2019 and maybe even into 2020. Okay, I'll leave it there just get back in line. Most of my other questions were answered. Thanks.

Okay.

Our next question come from Nigel Coe with Wolfe Research.

Thanks. Good morning, guys. Just come back to Hydraulics and the backlog was down, I think 11% and I understand the backup is coming off a very high level. But I'm just wondering to get to your sort of 4% to 5% growth for the remainder of the year in Hydraulics, do have to see orders come back positive or can we still achieve that targets with orders remaining flat to negative?

Yes, yes. The backlog Nigel was actually down 6% versus last year, but no problem at all, but I think the spirit of your question is once again very much like the question asked earlier, what gives us confidence that we can deliver the growth and the outlook for the year and I will say that while the backlog is down, it's still running at very, very high levels from a historical perspective. And so obviously the comparisons in general, the comps in general, get easier as the year wears on. And I think that is really the big message with respect to orders, with respect to sales, is that you have relatively easier comps as the year unwinds. We have some very specific initiatives that we have put in place as a company that are going to give us some growth that have been very well identified and we think once again that while there is a little bit of caution in the market, we do believe that the two big markets of Ag and construction continue to grow down the year.

Okay, great. And then my follow-on question is the three-point delta on the Vehicle outlook. And obviously, we are looking at the light vehicle markets significantly weaker. So that is explainable, because I'm just wondering, given the complexity in the segments, how much of that revenue delta is caused by a shift between your legacy transmission business and the Cummins JV? Was that a factor at all? Any help there would be great.

Yes, I mean, think in terms of you say the three point reduction in the growth for the quarter, I would say that was really driven principally by the weakness in global light vehicle markets around the world and you see the same data that we see. I mean China was down 10%; Europe was down for say, 3% to 4%; the Americas was down a couple of points and so, most of that weakness I would say, is really in the global light vehicle market. We do have, by the way, as I mentioned in my commentary, as the world moves from mails to automated transmissions, we continue to move more revenue into the joint venture with Cummins and that is a piece of what is going on in that business and the other one by the way, that I'll put it on the table because it becomes a much bigger impact in terms of the legacy business as we move forward. As the world moves to electrification and the eMobility segment, that also become revenue that comes out of our legacy vehicle business and shows up in eMobility. And so there are a number of factors that are going on that perhaps make the underlying revenue growth and our Vehicle business look worse than it really is.

Okay, Craig. We will dig in offline. Thanks very much.

Thank you.

Next question comes from Jeff Hammond with KeyBanc.

Hey. Good morning, guys. Just two on EPG, one, can you just talk about what is driving the margin bump without a change in sales? And then two, just as the Lighting spend has been announced, have you gotten any indications of interest that maybe a sale is likely or more likely than it's been? Thanks.

Yes, I would say on the margins, largely in EPG, I would say primarily we are getting better execution and better conversion in the business than we originally anticipated when we put the plan together. And so, it really complements to the team for really executing and delivering on some of the cost-out initiatives that we put in the plan. And so things are just going a little better than what we anticipated. And that is kind of what drove the increase in guidance for the year. As we mentioned in terms of Lighting, first of all I would say that the process is moving along as we anticipated and the prime path continues to be to spin the business and we still expect to be ready to make sure that we can get that done by the end of the year. To your point specifically around outside interest, yes. As you can imagine, there has been a number of companies who raised an interest in potentially acquiring the business. And it's always good to have an option in of choice and so we will be obviously working through these two alternatives, but once again, the prime path that we are on, is to spin the business.

Okay and then just macro level on Europe, I mean there is been some talk about slowing there, you mentioned the auto. Can you just talk about any areas of resilience or particular weakness in Europe? Thanks.

Yes, I think to your point around the macro environment in Europe and we all see the economic data coming out of Germany, would suggest that we are in fact seeing some slowdown in growth in Europe overall. Then, we have seen that as well across many of our businesses certainly seen it specifically in the short-cycle businesses. I would say very much like we are seeing in the US, the long-cycle businesses continue to perform well in Europe. So Electrical Systems & Services and data centers, specifically in Europe, Aerospace, obviously the global industry is doing well. And so I think, we have seen, I could perhaps on an accentuated basis, more or less the continuation of the same trends that we are seeing globally. But no question, Europe is a bit weaker. It's a bit weaker when you think about industrial markets and industrial controls and the like. But it's all incorporated in our guidance and we think that Europe essentially is not going to be terribly different than what we assumed when we put our profit plan together.

Our next questions comes from Andrew Obin with Bank of America.

Yes, guys. Good morning. Thanks for taking my call. Just a question on China. Can you talk about sort of China progression during the quarter? Frankly, I would have expected Mobile China Hydraulics to be a bigger positive. So I was just surprised that they didn't move the needle as much. And if you can give us any color as to how April is developing in China. Thank you.

Yes, I will say to your point, I mean China started off the year quite weak in January, and March was a much better month. And we see that and certainly the GDP data and the IP data specifically coming out of China. Even automotive markets were relatively speaking, stronger in the month of March than they were in the first two months of the year. And so I would say a lot of the economic stimulus that the Chinese government is putting into place are early indicators, but it would suggest that it is having the desired impact. And so we think China probably continues to strengthen from this point forward. Eaton overall, revenues actually grew in Q1 in China as a company. So it was - despite the fact that we had some weakness in automotive markets, we actually saw strong mid-single-digit growth in China, specifically. And to your point, yes, the Hydraulics, the excavator market was quite strong, up some 24%, I believe in Q1. It's an important market for us, but it's obviously not big enough to move the needle, given some of the offsets in other regions and other segments that are part of that business. But we do think China improves as we look forward.

And Andrew if you look at some of the construction metrics in China, they were pretty positive in Q1 and got more positive as the quarter went on. So offer starts are up I think 18% and residential starts were up 12%. So you are seeing a lot of the stimulus in China start flowing into somebody's construction-related markets.

And just the second question, you definitely highlighted strength in oil and gas. Can you give us more color sort of upstream, midstream, downstream and maybe some color, what specifically you are seeing at Crouse-Hinds?

Yes. No, I would say we are definitely seeing strength in oil and gas. And we think our business in the oil and gas, that we had a good first quarter of revenue, a good first quarter of orders and we think in the market in 2019 kind of grows mid-to-high single-digits. And then there as a company, we play more downstream than we do upstream, and so we are more exposed to that piece of the market. But we do think you saw the rig count is up somewhat 9% or so in Q1. And so we do think oil and gas continues to strengthen. And that is what we are seeing in our business as well.

And we are benefiting from some of these large downstream projects. For example, some of these LNG facilities that are being configured now and petrochemical, and so we are definitely more slanted toward downstream type applications.

And how fast does it hit your backlog that oil price moves? Do you see it immediately or is there a lag?

I would say there is generally a lag. I mean I have not studied that question in a lot of detail, Andrew. But there is clearly a lag from the move in oil price to them putting in place, capacity to increase drilling or exploration and certainly given the fact that we are downstream, and the LIBOR probably will even be bigger for us than it would be for companies who are more exposed on the upstream side.

Perfect. Thank you so much.

Next question is from Deane Dray with RBC.

Thank you. Good morning, everyone. Hey, maybe just touch on some of the variables in the quarter broadly that the number of the other industrial companies have called out as either a factor or not a factor. So I didn't hear anything particular about weather. Did that come into play? And you talked about the inventory adjustments. Did any of that you see any of your business experience a pull-in out of the first quarter into the fourth quarter last year, and might that have been a factor this quarter?

And I would say, Deane, we try to stay away from those kind of tangential elements around weather and the light because it's really difficult to ascertain how that impacted your business. And so at this point, I would say that, was weather an impact in Q1, it could have been; was it big enough to fundamentally change the outlook or kind of the thesis on the year, I would say probably not. And to the point around pull-ins, we really didn't see over any material pull-ins as well at the end of, let's say Q4, that would have impacted our Q1 business. And so really none of these extraneous variables, I would say would have had a material impact on the results in Q1.

That is fair. And did you say how April started?

No, we didn't. But I would say very much in line with the guidance that we just provided for Q2. We would expect 4% growth and I would say that what you are going to likely continue to see is that our long-cycle businesses Electrical Systems & Services and Aerospace and Electrical Products will continue to perform very well and as we mentioned, part of the reason why we have taken the guidance down in the short cycle business. So once again, I think the Company's revenue story is really playing out very much like we anticipated, perhaps with more extremes, with more strength in the long-cycle stuff offsetting perhaps a bit of weakness in the short-cycle businesses.

Thank you.

Thank you.

Our next question comes from Andy Casey with Wells Fargo.

Thanks, Craig. Good morning everybody. I apologize to beat a dead horse a little bit here. But on the Hydraulics margin decline and the reduced margin outlook, is some of that specifically the Q1 compression, is some of that related to accelerated restructuring?

Yes, no, I would say that not really, Andy. I mean we obviously are continuing to do restructuring in our business in Hydraulics and so I would say, the margin compression really is largely a function of volume as we articulated earlier, and not because we are doing significantly more restructuring in the business. Now I won't say, a lot of focus obviously in Hydraulics and we certainly understand why at the end of the day, Hydraulics as a segment, accounts for less than 10% of our profits. And so, I think we have a really strong story in a lot of our other businesses that are just performing extraordinarily well and more than making up, quite frankly, for the little bit of a shortfall that we are having in Hydraulics business. But no, it's really not restructuring, it's really more volume and decrementals on the change in volume.

Okay. Thanks, Craig. And then within Electrical Products, we highlighted some strength in residential, which a little bit surprising given some of the macro data that we have been seeing. Is that share gains or what are you seeing there?

Yes, I mean Resi for us, it was really a standout performer, quite frankly, in Q1 where we saw strong revenue growth and strong order growth and largely we do think this is essentially this factor of as you move to higher valued electrical equipment with AFCIs and ground fault and the regulations and the codes that are driving standards, are certainly helping that business. But by and large, just as you know, housing prices are up. We are seeing a lot of remodels that that don't show up necessarily in the housing start data, but we continue to be quite bullish on Resi and that is certainly played out in Q1.

Based on the data, we believe we have taken some care, but the market overall for Resi electrical equipment is pretty strong. That is what the mean data would show. And our belief is that, that is likely to last throughout this year.

We think Resi construction is up, our business taking up mid-to-high single-digits for the year. So it's really a source of strength we think for the Company.

Okay, thank you very much.

Our next question come from John Walsh with Credit Suisse.

Hi, good morning. I guess, maybe a question on the margin. Can you talk a little bit about how the price versus commodity inflation, I guess, tariff bucket performed in the quarter and how you are thinking about that cadence for the balance of the year?

Yes. Thank you. Appreciate the question. I mean, certainly as we said in the past and Q1 played out that way and we think the year as well is that we think price versus cost we think will be largely neutral for the Company. Commodity prices as you have probably all certainly noted have abated a little bit and the copper probably is the one holdout where copper prices are still running at relatively high levels, but most of the other commodities that are important to the Company, we have seen commodity costs reduce, and so obviously, that is a good thing for the Company. But also as we think about price and cost being kind of natural offsets for each other, less inflation we see, the less price we see though. The less tariff-driven cost increases that we see, we obviously can't pass that price in the marketplace. So we are very comfortable for 2019 that pricing cost will be largely neutral, very much like our guidance has been.

Great. And then maybe one more way to attack the negotiations comment. It doesn't sound like you want to give the absolute number, but is there a way to give it as a multiple of revenue in the business just to kind of frame the size a little bit more?

The size of negotiations as a percentage of revenue?

Yes, or the absolute number. I mean a couple of people have attacked it around what the 56% increase means year-on-year. Just...

Yes, I would say for us, we would really like not to give you a number, but I would tell you that it is a big enough number to give confidence and to be indicative of what the future of the business looks like. It is a very large, very material number.

Our next question comes from Julian Mitchell with Barclays.

Hi, thanks for squeezing me. And maybe just a question around the short-cycle businesses, particularly Vehicle and Hydraulics. Worsening revenue outlook in both versus your prior guide, but you sound intensely relaxed about the cost outlook. I just wondered why maybe there wasn't a bit more urgency around cost reduction in both businesses in the face of the worst top-line outlook. And then on Vehicle, it may just be something smaller or something in the mix, but I think you had a sort of low double-digit decremental margin in Q1. The guide for the year implies maybe a 30% decremental for the year as a whole. So is there something changing in terms of mix or what have you later in the year?

Yes, I mean maybe to address your first question first Julian, I mean I don't want to leave the wrong impression for a minute. To the extent that we have revenue shortfalls in any of our businesses, I can promise you that nobody is relaxed. Both our Vehicle business and our Hydraulics business is doing everything that they can. And in many cases more to flex the variable side of our cost, it's one of the key metrics that we track all of our businesses on, to the extent that they are flexing their cost down with changes and volume, but I would say for us that is table stakes. That is something that we expect of every business that we do every day. So it's not the kind of thing that say, we spent a lot of time talking about. The changes that we are talking about and revenue are not big enough to drive material changes in our restructuring plans, although in the event that the world changed dramatically, we would have the ability to do that. And so I can promise you nobody is in any way relaxed about ensuring that we are managing costs inside of our business. And then with respect to the decrementals in vehicle, yes, very strong decremental performance in Q1. For the balance of the year, perhaps a little bigger than that, but still well below what we would call as a normal decremental for our Vehicle business. And so once again, rest assured that our Vehicle team is on their game. They do a great job, always have, are managing costs in the face of a downturn. And so you can count on them continuing to deliver.

That is very helpful. And then my second question would just be around any interesting trends you'd call out in terms of inventory levels at OEMs or channel partners across the businesses? How do you feel about absolute inventory levels as they sit today and has there been any change in recent weeks or months?

Yes, if you are maybe taking the channel first, because that is kind of where you typically would see the big changes. And I would say by and large not. Inventory today with our distributor partners are largely in line with where they have been historically and in line with their own outlook for revenue growth. And so we have really not seen any material change there at all. As I mentioned on the call, perhaps where we have seen some adjustments, is on the OEM side and some of the short-cycle businesses. But other than that, really inventories are very well managed.

Very helpful. Thank you.

At this point of the time, I will take the last question from Mig Dobre with Baird.

Great. Thanks for squeezing me in and I want to go back to a question that is been asked before on Vehicle. So looking at this change in organic growth guidance, I mean, correct me if I'm wrong, but when you issued this guidance, I think pretty much everybody knew some of the challenges that existed in the light vehicle space in terms of builds for the year. So trying to figure out what changed in your mind that prompted this guidance reduction? Is it really more driven by what is been happening with the JV? Is it shifts to eMobility or how do we think about this move?

No, I would say really what we said, it's light vehicle markets around the world as I think is evidenced by Q1, have come in weaker at least than what we anticipated and I think in general, weaker than what most economic forecasters have anticipated. It has absolutely nothing to do with what is going on today inside of the commercial vehicle market. North America Class 8 truck continues to do just fine. The JV revenues, as I mentioned are growing nicely and certainly we have anticipated at the beginning of the year that there would be some transfer of revenue and that is largely on track. And this change really is a function of what we are seeing today, like global vehicle markets around the world now. We will have to see what the rest of the year brings, but certainly the Q1 weakness really in all three regions of the world is really what influenced largely our changing guidance for the year.

I see. Given the adjustment that you had to make the margin and the fact that margins are now going to be slightly lower year-over-year, as we look toward 2020 and we know the challenges that the commercial vehicle side of the business is going to have, is it fair for all of us to be thinking that margins will once again take a step down in 2020?

No, I would say not. I mean, as you know, we have done a lot of work over the last number of years to really build the business inside of our Vehicle business that essentially delivers strong margins through the cycle. And certainly as you know, because we have the joint venture, a lot of that volatility that used to sit inside of our business in our portfolio is no longer there. We have done a lot of restructuring and so I would say, you should not expect this business to take a material change at all in profitability even with, let's say, North America Class 8 market that is down significantly from where it is this year.

Alright, thank you.

Okay, good. Thank you. We have reached the end of our call and we do appreciate everybody’s questions. As always, Craig and I will be available to address all your questions today and do something the following weeks. Thank you all for joining us today.

Alright, thank you.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.